Chemical Cost Increases Seen Driving U.S. Manufacturers to Shift Production Overseas

By Editorial Staff On Jun 20, 2007

Boston — June 20, 2007 — A looming U.S. manufacturing crisis poses a threat to the U.S. economy and national security, according to a new report released by AMR Research, the National Association of Manufacturers and the NAM's Manufacturing Institute.

The report reveals that as a result of the increase in the cost and availability of chemicals — a vital raw material for most manufacturers — 25 percent of U.S. manufacturers will move some production overseas if current conditions persist. Across all companies that plan to move production offshore, the average amount of production shifted will be 32 percent.

The report titled, "The Hidden Backbone of U.S. Manufacturing," is based on findings from a survey of 165 U.S. manufacturing companies ranging in size from 100 employees to more than 50,000. The report notes that in a global economy, big cost increases in any local or regional commodity, like chemicals, can make it difficult to manufacture profitably from a U.S. base because competition from overseas makes it nearly impossible to pass those cost increases on to customers. For large companies this problem can be solved by moving production offshore or at least sourcing from offshore suppliers. For smaller companies, it may not be so easy.

Manufacturers' Chemical Dependence

Chemicals are often a misunderstood input into most of the products used in the U.S. market each day — from diapers and crayons to computers and pharmaceuticals. A total of 90 percent of manufacturers surveyed see the cost of materials sourced from the chemical industry increasing.

The impact of rising costs is severe given that most manufacturers depend on chemicals for some form of production and, as a raw material expense, chemical costs are a key driver of profitability. In fact, 55 percent overall have significant, direct dependence for production, and 73 percent of food, medicine and other process manufacturing operations rely on chemicals.

"The most immediate and obvious risk is to the resilience and competitiveness of U.S. manufacturing, and with it millions of jobs and domestic production," said Kevin O'Marah, senior vice president at AMR Research and co-author of the report. "But less obvious, and more troubling, is the consequence of an over reliance on offshore suppliers — our inability to respond effectively to a national crisis such as an earthquake, pandemic, or terrorist attack.

Call to Action

The report adds that there is little alternative for manufacturers as 50 percent say that materials sourced from the chemical industry are impossible to replace and a remaining 40 percent add that alternatives are available but at a far greater cost. As chemical inputs are both difficult to replace and invisible to consumers, margin pressures on U.S. based manufacturing are severe.

In a forward to the report, R. Keith Harrison, global product supply officer for The Procter & Gamble Company, writes: "Policymakers must recognize that policies impacting the vital chemical industry affect almost all of the manufacturing economy. The challenge is likely to be more serious than many in government realize, and as our research indicates, could lead to wide reaching losses to the U.S. manufacturing sector."

"Chemicals are a critical link in the supply chain for two-thirds of U.S. manufacturers, but America's chemical industry is threatened by rising domestic natural gas costs," said NAM President and CEO John Engler. "At stake is not only the future health of chemical manufacturing firms but also the thousands of companies that use their chemicals to make everything from crayons to computers. America needs a robust energy strategy to ensure affordable supplies, future development and greater efficiency."